How to Pay Off Your Credit Card Debt as Interest Rates Rise
Sometimes a life raft looks a lot like a credit card.
In an economy that has produced the highest rate of inflation since the early 1980s, Americans are struggling to meet day-to-day expenses and are increasingly relying on credit cards to stay afloat.
Amid a dramatic rise in the cost of living, credit card balances jumped 13% in the second quarter of 2022, posting the largest year-over-year increase in more than 20 years, according to a report by the Federal Reserve Bank of New York.
Total credit card debt fell to $890 billion, just below the 2019 record.
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“Many have to rely on credit cards to pay for basic necessities, especially with inflation pushing prices so high,” said Allen Amadin, president and CEO of American Consumer Credit Counseling.
The number of people with credit cards and personal loans also hit record highs in the second quarter, according to TransUnion’s latest report. credit industry report found.
Credit card interest rates near record highs
During this time, the The Federal Reserve is taking aggressive action to control inflation, including raising interest rates, which raises the cost of borrowing to slow spending, but that means maintaining a balance of one month to month will soon cost even more than it does today.
Since most credit cards have a variable rate, there is a direct link to the Fed’s benchmark index. As the federal funds rate rises, the prime rate also rises, and credit card rates follow. Cardholders typically see the impact within a billing cycle or two.
Average credit card rates are currently just over 17%, significantly higher than almost all other consumer loans, and could reach 19% by the end of the year, which would be an all-time high. .
“Reducing credit card debt is always crucial for financial health,” Amadin said. “However, now more than ever, it’s critical that Americans survive the day-to-day cost of living and still be able to put money aside to save.”
Here are his top three tips for paying off credit card debt, once and for all.
- Create a budget: To get started, using a spreadsheet or online tool can help you see where you’re spending money and how best to allocate those funds. It will also help you identify regular expenses that could divert money from your long-term goals.
- Decrease spending : When trying to reduce your debt, be sure to temporarily cut out any unnecessary expenses, such as streaming subscriptions, dining out, or impulse purchases. Reducing these expenses will help you stay on budget, stop building up your revolving balance, and pay off more debt.
- Pay more than the minimum: Paying your credit cards on time will save you late fees and penalties. But don’t just pay the required minimum – it won’t do much to avoid high interest charges on the balance. Only paying more than the minimum will reduce the amount of interest you have to pay each month and help you reach your goal.